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Roll No. : 510910259

Learning Centre : Systems Domain (2779)

Subject : Legal Aspects Of Business

Assignment No. : Set – I (MB0035)

Date of Submission : 2010

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MBA Semester 3
MB0035 – Legal Aspects of Business
Assignment Set- 1

1. ‘All contracts are agreements but all agreements are not contracts.’ Discuss.

Ans: A contract is a legally binding agreement or relationship that exists between two or more parties
to do or abstain from performing certain acts. A contract can also be defined as a legally binding
exchange of promises between two or more parties that the law will enforce. For a contract to be formed
an offer made must backed acceptance of which there must be consideration. Both parties involved
must intend to create legal relation on a lawful matter which must be entered into freely and should be
possible to perform.

An agreement is a form of cross reference between different parties, which may be written, oral
and lies upon the honour of the parties for its fulfilment rather than being in any way enforceable.

All contracts are agreement because there must be mutual understanding between two parties
for a contract to be formed. All parties should agree and adhere to the terms and conditions of an offer.

The following cases illustrate ways in which all contracts are agreements;

In the case of invitation to treat, where an invitation to treat is merely an invitation to make an
offer. When a firm's offer is accepted it results into a contract provided other elements of contracts are

Considering person A buying a radio on hire purchase from person B who deals with
electronics and its appliances. Both parties must come to an agreement on payment of monthly
instalment within specified period of time. Such an agreement result to specialty contract which a
contract under seal.

All contracts are agreement until avoided for example, avoidable contract where one of the
parties can withdraw from it if s/he wishes. This occurs due to minor agreement and misrepresentation
or undue influence. Considering a case where person A make contract with person B but during the
contract period B realizes that he was engaged to perform an agreement under undue influence.

Definition of contract: According to section 2(h) of the Indian Contract Act: "An agreement
enforceable by law is a contract." A contract therefore, is an agreement the object of which is to create a
legal obligation i.e., a duty enforceable by law.

From the above definition, we find that a contract essentially consists of two elements: (1) An
agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine these elements

1. Agreement. As per section 2 (e): "Every promise and every set of promises, forming the consideration
for each other, is an agreement." Thus it is clear from this definition that a 'promise' is an agreement.
What is a 'promise'? The answer to this question is contained in section 2 (b) which defines the term."
When the person to whom the proposal is made signifies his assent thereto the proposal is said to be
accepted. A proposal, when accepted, becomes a promise."

An agreement, therefore, comes into existence only when one party makes a proposal or offer to the
other party and that other party signifies his assent (i.e., gives his acceptance) thereto. In short, an
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agreement is the sum total of 'offer' and 'acceptance'.

On analyzing the above definition the following characteristics of an agreement become evident:

(a) At least two persons. There must be two or more persons to make an agreement because one person
cannot inter into an agreement with himself.

(b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject matter of the
agreement in the same sense and at the same time.

2. Legal obligation. As stated above, an agreement to become a contract must give rise to a legal
obligation i.e., a duty enforceable by law. If an agreement is incapable of creating a duty enforceable by
law, it is not a contract. Thus an agreement is a wider term than a contract. "All contracts are
agreements but all agreements are not contracts,"

Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend's house or to
take a walk together are not contracts because they are not likely to create a duty enforceable by law for
the simple reason that the parties never intended that they should be attended by legal consequences.

2. ‘Not all persons have the capacity to enter into a contract.’ Discuss this statement.

Ans: Not all people are completely free to enter into a valid contract. The contracts of the groups of
people listed below involve problematic consent, and are dealt with separately, as follows:

 people who have a mental impairment;

 young people (minors);
 bankrupts;
 corporations (people acting on behalf of a company); and
 prisoners.

People who have a mental impairment: Generally speaking, people are free to enter into contracts
even though they may have a mental impairment, or are temporarily disabled by drugs or alcohol. They
are, however, sometimes vulnerable to being bound by contracts they do not fully understand. The
question of capacity to make the contract often arises only after the contract is in place.

People with disabilities and their advocates will find some protection in the rule that a contract
is not valid and enforceable unless there was genuine consent to its making.

Capacity to give consent involves a general understanding of the nature of the contract (not
necessarily its fine details). A person with a mental impairment, for example, may have the capacity to
understand some contracts (for example, buying a loaf of bread), but not to understand other, more
complicated contracts (for example, buying a car on credit).

Where a person with a disability did not understand the general nature of the contract, a court
can intervene to set aside the contract only if:

 the other party knew (or ought to have known) of the disability or lack of capacity; and
 the person with the disability can give back most of the benefit they received under the
contract; and
 the benefit received by the other person has not been sold to a third party who did not know
the previous transaction might not be valid. Generally, to escape the consequences of a
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contract, the other party should be notified of the intention not to be bound by the contract
within a reasonable time.

If the contract was made during a period when the person was able to understand it (legally
termed a "lucid interval"), the contract will be binding even though the other party knew of the

Some people with disabilities (temporary or long-term) are assisted by an administrator

appointed by the Guardianship List of the Victorian Civil Administration Tribunal (VCAT). People
with disabilities who have an administrator appointed to act on their behalf are generally not free to
enter into contracts, unless this is approved in writing by their administrator or an order of the
Guardianship List of VCAT.

A person with an intellectual or psychiatric disability will be liable to pay only a reasonable
price for necessaries sold and delivered. "Necessaries” and the rules applicable here, are dealt with in
"Young people", below (because the definition is the same for both groups).

Young people: The term young person is used here to refer to anyone under the age of 18 years.
Sometimes legal writing refers to minors or infant.

The exact capacity of young people to bind themselves and be bound by contract is limited but also
unclear, because no Act of Parliament completely covers this area of law. The Supreme Court 1986
(Vic) in sections 49 to 51, "Contracts of Minors", is the most useful reference on this question.

Binding contracts and young people

Contracts for the supply of "necessaries" will generally be binding. There are no hard and fast
rules to identify what is "a necessary", but it does include the sorts of things the young person needs to
live a reasonable lifestyle. It includes basics such as:

 food;
 clothing;
 a place to live;
 medicine,

and so on.

It will also include any contracts relating to the young person's education, apprenticeship or
something very similar, if it can be shown to be of benefit to the young person. While a court has not
yet considered the issue specifically, mobile phones are probably not necessaries.

The young person contracting in this situation will be held bound to pay a reasonable price
(although that may not be the contract price) for necessaries actually sold and delivered. ("Delivery" is a
technical term. Generally, delivery takes place when the seller has given the buyer the power to take the
goods away.) Where necessaries have been sold but there has been no delivery, the young person does
not have to take delivery or pay for the goods.

Non-binding contracts and young people

Two classes of contracts are not binding on a young person, namely:

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 Contracts which are not for necessaries; and

 Contracts for the repayment of money lent or to be lent (that is, any form of credit contract).

Where a young person has already paid money under a non-binding contract, that money will
not be recoverable unless no benefit has been received by the young person. The young person can,
however, refuse to make any further payments under the contract. It is not certain who then own goods
that are not necessaries. It appears that they become the property of the young person unless the young
person has fraudulently misrepresented their age.

Even after turning 18, a person cannot confirm a prior contract and then become bound by it.
Any money paid by a young person under such circumstances may be recovered.

Bankrupts: Bankrupt people are not deprived of their general capacity to contract. However, there are
provisions of the Bankruptcy Act 1966 that relate to dealings and contracts by bankrupts. For example,
obtaining credit of $4,145 (indexed) or more without disclosing your bankruptcy is an offence and
liable to penalty under section 269 of the Bankruptcy Act.

Corporations: A corporation is an artificial body created by law. The corporation has a legal existence
separate from the individual people who comprise it. However, a company has the legal capacity of a
natural person and therefore has the capacity to enter contractual relations. This is so even if there is an
express prohibition contained in the company's constitution. Such transactions are not deemed void
and beyond the company's powers simply because the exercise of such powers is in breach of the
restrictions placed in the company's constitution.

A company has the capacity to enter contractual relations, but such relations are only binding
on the company if those acting on behalf of the company do so with the company's express or implied
authority (s.126(1)). The courts have been quite liberal in their interpretation of implied authority. It
has been found that in cases where directors with express authority have acquiesced and allowed a
director with no authority to frequently enter contractual relations on behalf of the company, that such
directors have implied authority and therefore can contractually bind the company.

Prisoners: During their imprisonment, prisoners may enter contracts, including contracts to buy and
sell property. The usual restrictions about supervision and censorship of anything coming into the
prison still apply, so that the permission of Corrections Victoria is required before a prisoner may sign
for, deliver or receive any document.

3. Discuss how a contract can be discharged by breach.

Ans: Discharge by breach of contract: Breach of contract by a party thereto is also a method of
discharge of a contract, because “breach” also brings to an end the obligations created by a contract on
the part of each of the parties. Of course the aggrieved party i.e., the party not at fault can sue for
damages for breach of contract as per law; but the contract as such stands terminated.

Breach of contract may be of two kinds: (1) Anticipatory breach; and (2) Actual breach.

1. Anticipatory breach: An anticipatory breach of contract is a breach of contract occurring before

the time fixed for performance has arrived. It may take place in two ways: (a) expressly by words
spoken or written. Here a party to the contract communicates to the other party, before the due
date of performance, his intention not to perform it. (b) Impliedly by the conduct of one of the
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parties. Here a party by his own voluntary act disables himself from performing the contract.
When a party to a contract has refused to perform or disabled himself from performing, his
promise in its entirety, the promise may put an end to the contract, unless he has signed, by
words or conduct his acquiescence in its continuance.
2. Actual breach: Actual breach may also discharge a contract. It occurs when a party fails to
perform his obligations upon the date fixed for performance by the contract. Actual breach
entitles the party not in default to elect to treat the contract as discharged and to sue the party
at fault for damages for breach of contract.

Remedies for Breach of Contract

Whenever there is breach of a contract; the injured party becomes entitled to any one or more of the
following remedies against the guilty party:

1. Rescission of the contract.

2. Suit for damages.
3. Suit upon quantum merit.
4. Suit for specific performance of the contract.
5. Suit for an injunction.

As regards the last two remedies stated above, the law is regulated by the Specific Relief Act, 1963.

1.Rescission of the contract: When there is a breach of contract by one party, the other party may
rescind the contract and need not perform his part of obligations under the contract. But in case the
aggrieved party intends to sue the guilty party for damages for breach of contract, he has to file a suit for
rescission of the contract. When the court grants rescission, the aggrieved party is free from all his
obligations under the contract and becomes entitled to compensation for any damage which he has
sustained through the non-fulfilment of the contract (Sec. 75).

2. Suit for damages: Damages are a monetary compensation allowed to the injured party for the loss or
injury suffered by him as a result of the breach of contract. The fundamental principle underlying
damages is not punishment but compensation. By awarding damages the court aims to put the injured
party into the position in which he would have been, had there been performance and not to punish
the defaulting party. As a general rule, “compensation must be commensurate with the injury or loss
sustained, arising naturally from the breach.” “If actual loss is not proved, no damages will be awarded.”

3. Suit upon quantum merit (Sections 65 and 70): The third remedy for a breach of contract available
to an injured party against the guilty party is to file a suit upon quantum merit. The phrase quantum
merit literally means “as much as is earned” or “in proportion to the work done.” This remedy may be
availed of either without claiming damages (i.e., claiming reasonable compensation only for the work
done) or in addition to claiming damages for breach (i.e., claiming reasonable compensation for part
performance and damages for the remaining unperformed part).

4. Suit for specific performance: Specific performance means the actual carrying out of the contract as
agreed. Under certain circumstances an aggrieved party may file a suit for specific performance, i.e., for
a decree by the court directing the defendant to actually perform the promise that he has made. Such a
suit may be field either instead of or in addition to a suit for damages.

A decree for specific performance is not granted for contracts of every description. It is only
where it is just and equitable so to do, i.e., where the legal remedy is inadequate or defective, that the
courts issue a decree for specific performance. It is usually granted in contracts connected with land,
buildings, rare articles and unique goods having some special value to the party suing because of family
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association. In all these contracts monetary compensation is not an adequate relief because the injured
party will not be able to get an exact substitute in the market.

5. Suit for an injunction: ‘Injunction’ is an order of a court restraining a person from doing a
particular act. It is a mode of securing the specific performance of the negative terms of the contract. To
put it differently, where a party is in breach of a negative term of the contract (i.e., where he is doing
something which he promised not to do), the court may, by issuing an injunction, restrain him from
doing, what he promised not to do. Thus ‘injunction’ is a preventive relief. It is particularly appropriate
in cases of ‘anticipatory breach of contract’ where damages would not be an adequate relief.

4. Discuss the essentials of a contract of guarantee.

Ans: Contract of Guarantee: It is a contract to perform the promise or discharge the liability of a
third person in case of his default (S. 126). Surety is a person who gives the guarantee. The person in
respect of whose default the guarantee is given is called ‘principal debtor.’ The person to whom the
guarantee is meant for is called the ‘Creditor’.

Essential of Contract of Guarantee:

1. From: A contract of guarantee is just like any other contract which may be either oral or in

2. Tripartite agreement: Every contract of guarantee involves three agreements between (i) the
creditor and principal debtor, (ii) the surety and the creditor, and (iii) the surety and the principal

Consent of the parties: There must be consent of all the three parties.

Example: X sells and delivers goods to Y. X afterwards requests Z to pay in default of Y. Z agrees to
do so. Here, Z cannot become surety without the consent of Y.

3. Secondary Liability: The test which applied to determine whether the contract is one of
guarantee or indemnity is whether the obligation has been undertaken at the debtor’s request in
which case the contract is one of guarantee. If the obligation is undertaken without any request of
the debtor, the contract is one of indemnity. The intention of the parties is also important whether
one making oneself primarily or collaterally liable. Hence, the promise to be primarily and
independently liable is not a guarantee, though it may be an indemnity. Hence in a contract of
guarantee, the primary liability is with the principal debtor.

4. Existing liability: It is not necessary that the principal contract must be in existence at the time
the contract of guarantee is made; the original contract by which the principal debtor undertakes to
repay the money to the creditor may be about to come into existence.

1. The promise to pay must be conditional: In other words, the liability of the surety should arise
only when the principal debtor makes a default.
2. Consideration: Something done for the benefit of the principal debtor is considered as
consideration for the guarantee to make the contract valid. The legal detriment incurred by the
promisee at the promisor’s request is sufficient to constitute the element of consideration.
3. Competency: The principal debtor, surety and creditor must be a person competent to
contract. However, under certain circumstances, a surety is liable though the principal debtor is
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not i.e. the original contract is void as is the case of a contract with a minor in which the surety
is liable not only as surety but also as principal debtor. A person of unsound mind or an
undercharged insolvent cannot give a valid guarantee.
4. Consent: There must be free consent; otherwise the contract of guarantee may become void or
voidable. Generally a contract of guarantee is not the contract of utmost good faith i.e.,
uberrimae fidei, but it is sometimes a first cousin to it. Mere non-disclosure will not affect the
contract of surety unless there is an intentional concealment.

5. How can negotiable instruments be endorsed? Discuss in detail.

Ans: Section 15 defines endorsement as follows: “When the maker or holder of a negotiable
instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or
face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper
intended to be completed as negotiable instrument, he is said to indorse the same, and is called the

Thus, an endorsement consists of the signature of the holder usually made on the back of the
negotiable instrument with the object of transferring the instrument. If no space is left on the back of
the instrument for the purpose of endorsement, further endorsements are signed on a slip of paper
attached to the instrument. Such a slip is called ‘allonge’ and becomes part of the instrument. The
person making the endorsement is called an ‘endorser’ and the person to whom the instrument is
indorsed is called an ‘endorsee.’

Kinds of Endorsements: Endorsements may be of the following kinds:

1. Blank or general endorsement: If the endorser signs his name only and does not specify the
name of the endorsee, the endorsement is said to be in blank. The effect of a blank
endorsement is to convert the order instrument into bearer instrument which may be
transferred merely by delivery.
2. Endorsement in full or special endorsement: If the endorser, in addition to his signature, also
adds a direction to pay the amount mentioned in the instrument to, or to the order of, a
specified person, the endorsement is said to be in full.
3. Partial endorsement: Section 56 provides that a negotiable instrument cannot be indorsed for
a part of the amount appearing to be due on the instrument. In other words, a partial
endorsement which transfers the right to receive only a part payment of the amount due on the
instrument is invalid.
4. Restrictive endorsement: An endorsement which, by express words, prohibits the endorsee
from further negotiating the instrument or restricts the endorsee to deal with the instrument as
directed by the endorser is called ‘restrictive’ endorsement. The endorsee under a restrictive
endorsement gets all the rights of an endorser except the right of further negotiation.
5. Conditional endorsement: If the endorser of a negotiable instrument, by express words in the
endorsement, makes his liability, dependent on the happening of a specified event, although
such event may never happen, such endorsement is called a ‘conditional’ endorsement.

In the case of a conditional endorsement the liability of the endorser would arise only upon the
happening of the event specified. But the endorsee can sue other prior parties, e.g., the maker, acceptor
etc., if the instrument is not duly met at maturity, even though the specified event did not happen.

6. Why do you think an agreement to take a person to moon for a holiday cannot be a
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Ans: The essentials of a valid contract state that “The terms of the agreement should be
capable of being performed and should be certain”. Taking a person to the moon for a holiday
cannot be a valid contract because neither the activity is being capable of being performed in the
near future nor it is certain that someone making such kind of promise will be able to fulfil. We all
know that moon missions are multi-billion projects and are funded by governments, so someone
making such a promise would only be a fraud. The government laws have also not yet authorized
any agency or person to make such contracts so any agency or person promising someone a holiday
on the moon is unlawful which is also an essential term of a valid contract.